The end of the ‘Washington consensus’ in Latin America

Colombian President Juan Manuel Santos sent shockwaves through Washington when he told the Financial Times that his nation is holding negotiations with China to build a multibillion dollar “dry canal” that would compete with the Panama Canal. After all, Santos said, China is “the new motor of the world economy”.

This deal is charged with politics. Colombia is trying to get the US to pass a long-stalled trade deal. And let us not forget that the original canal was to be the result of an agreement between the US and Colombia. When the Colombians didn’t like the deal the US had on offer and threatened to squelch it, Washington supported Panamanian separatist movements and got itself a new country to build a canal with.

But that’s all water under the isthmus. Or so we thought.

Whether or not this deal goes through, it highlights the stark contrast between China’s foreign economic ventures and those of the United States.

For 30 years, Washington has been shopping a trade-not-aid based economic diplomacy across Latin America and beyond. According to what is generally known as the “Washington consensus”, the US has provided Latin America loans conditional on privatisation, deregulation and other forms of structural adjustment. More recently, what has been on offer are trade deals such as the US-Colombia Free Trade Agreement: access to the US market in exchange for similar conditions.

The 30-year record of the Washington consensus was abysmal for Latin America, which grew less than 1% per year in per capita terms during the period, in contrast with 2.6% during the period 1960-81. East Asia, on the other hand, which is known for its state-managed globalisation (most recently epitomised by China), has grown 6.7% per annum in per capita terms since 1981, actually up from 3.5% in that same period.

The signature trade treaty, of course, was the North American Free Trade Agreement (Nafta). Despite the fact that exports to the US increased sevenfold, per capita growth and employment have been lacklustre at best. Mexico probably gained about 600,000 jobs in the manufacturing sector since Nafta took effect, but the country lost at least 2m in agriculture, as cheap imports of corn and other commodities flooded the newly liberalised market.

This dismal economic record prompted citizens across the Americas to vote out supporters of this model in the 2000s. Growth has since picked up, largely from domestic demand, and exports to China and elsewhere in Asia.

Interestingly, the only significant card-carrying members of the Washington consensus left in Latin America are Mexico and Colombia. That explains why Washington was so shocked at Santos’ remarks.

Before China “gets” Colombia, there is now a rallying cry that says the US must pass the US-Colombia Free Trade deal – which would make Colombia deregulate its financial services industry, scrap its ability to design innovative policies for development, and open its borders to subsidised farm products from the United States. According to a study by the UN, the agreement will actually make Colombia worse-off by up to $75m, or 0.1% of its GDP.

Ironically, the US’s renegade Congress failed to renew trade preferences last week, under which the majority of Colombia’s exports enter tariff-free without the conditional terms of US trade deals.

Meanwhile, the Financial Times reports that China has lent over $110bn to developing countries over the past two years, more than the World Bank has made in three years. Relative to the World Bank, these loans come with far fewer “conditionalities” and are going to massive infrastructure projects across Africa and in places like Argentina, Venezuela and, perhaps now, even Colombia.

China is loaning nations money to fund each nation’s own priorities for growth and development. China isn’t doing so out of altruism; these are not acts of sainthood. China just has a better handle on economic development. Looking at the experience of other East Asian nations and itself, these types of projects are a much better bet than trade deals. China hopes that the projects will jumpstart growth so that nations will be able to supply greater amounts of exports to China, and be a source of Chinese exports. US trade deals, by contrast, seem to have been hijacked by a few interest groups that may benefit in the short term, but have dubious results over time.

The bigger point here is that, even if Colombia gets the sorry trade deal it wants and doesn’t get a canal, the United States is literally and figuratively bankrupt in its competition with Chinese finance. Literally, because the US has the largest deficit on the planet and owes a big chunk of that to the Chinese. Figuratively, because the economic model that the US has exported to Latin America hasn’t worked. China is funding infrastructure, exploration, science and technology, and all the other things that President Obama says we should be spending on here at home.